Petrobras: No Hope for This Stock

Petróleo Brasileiro S.A. – Petrobras (PBR) announced nine months ended September 30, 2015 starting January 2015 net income of R$ 2,102 million, down 58 percent compared to the same period last year. However, operating income for January till September 2015 was R$ 28,635 million, up 149% compared to net income from operations for January till September 2014.

Petrobras declared third quarter of 2015 net debt of US$ 101,273 million, down 5 percent compared to the fourth quarter of 2014 and mainly attributable to superior cost-optimization initiatives taken during the quarter.

The oil and gas drilling company reported weaker net income for nine months ended September 30, 2015 starting January 2015, primarily due to greater finance expenditures during the period.
However, growth in operating income was a result of healthy oil product sales margins in the local market and improved crude oil export volumes allowed by a 7% growth in local crude oil production, in spite of a fall in local demand.

A look at the plan  

Petrobras has set four major targets for its business and management plan for 2015 till 2019 including, significant focus on profitability, delivering enhanced shareholder’s value, strategic deleveraging and betterment of performance management through superior capital discipline. The energy mining company has also revised its planned divestment for 2015 till 2016 to US$ 15.1 billion from previously decided US$ 13.7 billion and in line with its continued commitment to deliver significant profitability. Going forward, Petrobras has targeted US$ 42.6 billion worth of businesses restructurings, strategic demobilization of assets and extra divestments. Moreover, Petrobras has significantly lowered its investment target for 2015 till 2019 by 37% to US$ 130.3 billion compared to investment target set for 2014 till 2018 business and management plan of US$ 206.8 billion.

The integrated energy company is particularly focused on controlling exploration expenses while mainly spending on production development. The downstream investments are also primarily focused on maintenance and infrastructure along with nearly 80% of US$ 6.3 billion of gas and power investments targeted towards the development of pipelines.

The ongoing changes in the short-term investment plans are a result of the company’s continued commitment towards optimizing the cost structure, generating outstanding returns from existing operations and delivering sustainable long-term profitability.

Reducing size

Petrobras has downward revised its business and management plan for oil and NGL production in Brazil and abroad for 2015 till 2019 from its earlier 2014 till 2018 BMP mainly due to the currently depressed global energy demand and pricing environment, hurting the company’s key margins and Petrobras incapable of covering the overall expenditures.

The oil and natural gas production output from key facilities run by the company in the pre-salt layer surpassed 1 million boed in September, with an average output of 1.028 million boed and soon achieving a record output of 1.12 million boed.  The unique Libra Consortium comprising of Petrobras (40% ownership), Shell (about 20%), net (20%), CNOOC (10%), CNPC (10%) and PPSA (contract manager) confirms the Libra field potential in the strategic pre-salt Santos Basin and is expected to deliver impressive sustainable high-grade production profitability for the company.

The strategic reduction of oil and gas near-term production outlook by Petrobras is believed to preserve enough cash flows to be employed at the joint operations in the Consortium for delivering already identified long-term high-quality production at the pre-salt Santos Basin.

A majority of the key investment analysts are extremely disappointed about the growth prospects of the company given its weak financial position amid tough global demand and pricing environment, restricting Petrobras to operate profitably.

Conclusion

Overall, the investors are advised to “Sell” any equity held in Petróleo Brasileiro S.A. – Petrobras considering its disappointing financial position with significant total debt of $134.83 billion against weaker total cash position of $27.75 billion only, restricting the company to make future growth investments. The profit margin of -7.62% suggest no profit but loss. However, the PEG ratio of 8.63 appears to be misleading and signify healthy company growth.
Published on Jan 13, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...